Investing In A World Of Opportunity
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Transcript of Investing In A World Of Opportunity
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Benefits of Global Investing
Special Risks of Global Investing
How to Invest Globally
| NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE |
Title
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Investin
g in a
World of
Opportu
nity
Today we are going to talk about investing in markets outside the UnitedStates. In the next 15 minutes, we’ll discuss:
• The benefits of global investing
• The special risks of global investing
• And the steps you can take to invest globally in your portfolio
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Benefits of global investing
Don’tIgnore theOther Half
Source: Ibbotson Presentation Materials. ©2005 Ibbotson Associates, Inc.All r ights reserved. Used with permission. Capitalization calculated atyear-end 2004. Estimates are not guaranteed. This is for illustrativepurposes only and not indicative of any investment.
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World market capitalization
50%UnitedStates
23%Europe
(ex-UnitedKingdom)
12%Japan
8%United
Kingdom
4%Asia Pacific(ex-Japan)
3%Canada
Thirty years ago, the United States accounted for more than 60% of theworld’s stock market capitalization.
• That’s no longer true.
• If you ignore foreign stock markets today, you ignore one half of theworld because foreign stock markets now account for 50% of total worldstock market capitalization.
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Benefits of global investing
Foreign—or Familiar?
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Bayer HondaNokia
NestléL’Oréal
If you ignore foreign stock markets, you could miss out on marketleaders—and household names—in key industries such as thesehealthcare, telecommunications, automotive and consumer productscompanies.
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Benefits of global investing
Accessto theFastestGrowingEconomies
World Economies and GDP Growth
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2
0
-2
-4
-8
-10
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6
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ArgentinaChinaIndia
2001 2002 2003 2004 2005
IrelandRussiaThailand
TurkeyUnited States
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Sources: 2001—2004, World Bank Group,World Development Indicators Database;2005 estimates: International MonetaryFund, World Economic Outlook, April 2005.
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The U.S. economy has been growing at a solid pace, as measured bygross domestic product or GDP—a common measure of the goods andservices produced by an economy.
• But as you can see from this table, U.S. GDP has not grown nearly asfast as in many foreign economies.
• Why does economic growth matter? Because strong financialperformance over the long term has historically been the result ofsteady economic growth.
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Benefits of global investing
GreaterGrowthPotential
Greece69%
New Zealand26%
New Zealand9%
Sweden65%
Austr ia17%
Australia2%
Germany64%
Australia-0.3%
Ireland -3%
Spain59%
Italy-6%
Austr ia -5%
Norway55%
United States29%
United States-22%
United States-12%
United States11%
Austr ia72%
Greece46%
Belgium45%
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Annual returns of developed world’s
best-performing stock markets
Source: Ibbotson Presentation Materials. ©2005 Ibbotson Associates, Inc. All r ights reserved. Used with permission. Returns expressed in U.S. dollars.Foreign returns by country—each country’s Morgan Stanley Capital International Index. U.S. returns—Standard & Poor’s 500 Index. This is for illustrativepurposes only and not indicative of any investment. It is not possible to invest directly in an index. International investing involves certain r isks, such ascurrency fluctuations, economic and political instability, and potential foreign taxation.These r isks are heightened for investments in emerging market countr ies. Past performanceis no guarantee of future results.
Versus U.S.
stock market
2002
2001
2004
2003
The U.S. stock market has a solid long-term performance track record.However, it is rarely the top-performing market in the world.
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Growth of $1,000 December 1969—September 2005
Benefits of global investing
Greater Diversification with a Global Portfolio
Source: Thomson Financial, calculated by BlackRock, 2005. This information is hypothetical and for illustrative purposes only. It does not reflectany particular investment. Global portfolio assumes rebalancing every 12 months. U.S. stocks—Standard & Poor’s 500 Index. Europeanstocks—MSCI Europe Index. Pacific stocks—MSCI Pacific Index. Past performance does not guarantee future results. It is not possible to investdirectly in an index.
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AverageReturn12.03%11.74%11.10%10.99%
EndingWealth$57,973$52,889$43,104$41,520Pacific stocks
European stocks
U.S. stocks
Global portfolio
• A global portfolio consisting of U.S. and foreign stocks outperformed adomestic portfolio of U.S. stocks for the period from December 1969through September 2005.
• The performance difference was by a considerable margin.
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Source: Ibbotson Presentation Materials. ©2005 Ibbotson Associates, Inc. All r ights reserved. Used with permission. Data in U.S. dollars. Risk is measuredby standard deviation. Risk and return are based on 1970–2004 data. U.S. Bonds—20-year U.S. government bond; U.S. Stocks—Standard & Poor’s 500Index; Canadian Stocks—Morgan Stanley Capital International Canada Index; European Stocks—Morgan Stanley Capital International Europe ex-U.K. Index;U.K. Stocks—Morgan Stanley Capital International U.K. Index; Japanese Stocks—Morgan Stanley Capital International Japan Index; Pacific Stocks—MorganStanley Capital International Pacific ex-Japan Index. It is not possible to invest directly in an index. International investing involves certain r isks, such ascurrency fluctuations, economic and political instability, and potential foreign taxation. These r isks are heightenedfor investments in emerging market countr ies. Past performance is no guarantee of future results.
International investments can enhance domestic portfoliosInternational regions 1970—2004
Benefits of global investing
TheBest ofBothWorlds
Risk
Retu
rn
Domestic portfolios
U.S. bonds
U.S. stocks
Global portfolios Japanesestocks
U.K. stocks
Canadian stocks
Europeanstocks
Pacificstocks
9%
10%
11%
12%
13%
14%
15%
16%
17%
5% 10% 15% 20% 25% 30% 35% 40%
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• Foreign stocks are generally considered more risky than U.S. stocks.
• As this chart illustrates, for the period under examination, an investorcould have achieved higher returns at given levels of risk by includingstocks from other countries and regions in a domestic portfolio.
• This improvement in the risk/return trade-off was due to the lowcorrelation of the international asset classes with the U.S. assetclasses. As a result, points on the global frontier—the dark line that runsfrom the lowest-performing and least risky market and asset class tothe highest-performing and most risky market—offered higher returnsper unit of risk than points on the domestic frontier.
The information presented herein is for illustrative purposes only and not indicative of any investment. The data assumes reinvestment of allincome and does not account for taxes or transaction costs. All values are expressed in U.S. dollars. Diversification does not eliminate the risk ofexperiencing investment losses. Risk is measured by standard deviation. Standard deviation measures the fluctuation of returns around thearithmetic average return of the investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.Return is measured by arithmetic mean return. Risk and return are based on annual data over the period 1970-2003. The portfolios presented inthis image are based on modern portfolio theory. Government bonds are guaranteed by the full faith and credit of the United States government asto the timely payment of principal and interest. Bonds in a portfolio are typically intended to provide income and/or diversification. U.S. governmentbonds may be exempt from state taxes, and income is taxed as ordinary income in the year received. With government bonds, the investor is acreditor of the government. Stocks are not guaranteed and have been more volatile than bonds. International stocks have been more volatile thandomestic stocks. Returns and principal invested in stocks are not guaranteed. Stocks provide ownership in corporations that intend to providegrowth and/or current income. Capital gains and dividends may be taxed in the year and country earned. International investments involve specialrisks such as fluctuations in currency, foreign taxation, economic and political risks, and differences in accounting and financial standards. It is notpossible to invest directly in an index. Past performance is no guarantee of future results.
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Special risks of global investing
UnderstandingGeneral Risks• Less stringent standards and practices• Heightened currency fluctuation• Heightened political risks
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Understanding
General Risks
Investing in foreign markets carries special general risks.
• Reporting practices and accounting standards are not as stringentoutside the U.S.
• Currency fluctuations heighten risk because the return on aninvestment depends on its actual performance and the performance ofthe currency. A declining dollar enhances return; a rising dollar detractsfrom its return.
• In addition, there are political risks that can have a heightened impactin foreign markets.
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Special risks of global investing
UnderstandingDeveloped Markets
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• Rules, business standards and practices similar to the United States
• Low–to–moderate economic growth
• Generally less volatile returns than emerging markets
Some foreign markets are more risky than others. Established marketsin stable economies are known as developed markets.
• Their rules, business standards and practices tend to be more likethose in the United States
• Their economic growth rates tend to be low to moderate.
• And, their returns are generally less volatile than emerging markets.
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Special risks of global investing
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UnderstandingEmerging Markets• Less established markets and more volatile returns
• Relatively high but less stable economic growth
• Lower standards of living
• Less stringent rules and regulations
• Emerging nations tend to have less-established markets and morevolatile stock market returns.
• Their economic growth rates tend to be higher than in developedmarkets, but their economies also tend to be less stable.
• They have lower standards of living and less stringent rules andregulations.
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Growth of $1,000 invested in the MSCI EAFE Index, 12/31/69—9/30/05
Special risks of global investing
Think Long Term
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Source: Lipper data, calculated by BlackRock, 2005. This information is hypothetical and for illustrative purposes only. It does not reflect any particularinvestment. It is not possible to invest directly in an index. Past performance does not guarantee future results.
$43,428
Thinking Long
Term
One way to ease the added risks of investing in foreign markets is tothink long term. Despite volatility, long-term returns from foreignmarkets have been strong.
• As this slide shows, a $1,000 investment in foreign markets thattracked the Morgan Stanley Capital International EAFE Index, grew tomore than $43,000 for the period between December 1969 andSeptember 2005.
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How to invest globally
Mutual Funds Make It Easy• Professional research and management• Lower transaction costs• Returns denominated in U.S. dollars• Foreign tax payment simplified• Investment information in English
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Mutual Funds Make It
Easy
Investing in foreign markets through a mutual fund offers professionalresearch and management. With a fund as your go-between, you don’thave to deal with foreign currencies, foreign taxes or investmentinformation written in a foreign language because the fund handlesthose matters. Transactions are likely to be less costly and simpler.
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How to invest globally
Three Ways to Go Global1 Global or worldwide funds
2 Foreign or international funds
3 Country or region-specific funds
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The most conservative way to gain exposure to foreign markets is with afund that invests globally, in the United States as well as other majormarkets. Foreign or international funds invest exclusively in marketsoutside the United States. Some funds target a specific country orregion. These funds tend to be more risky.
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Indices used in this seminar
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The Morgan Stanley Capital International (MSCI) EAFE® Index represents international equityperformance and is a capitalization weighted index based on securities from Europe, Australasia andthe Far East.
The Standard & Poor’s 500® Index is composed of selected stocks, most of which are listed on theNew York Stock Exchange, and is focused on the large cap segment of the market, with over 80%coverage of U.S. equities.
Equities by country are represented by the specific MSCI country index (e.g., MSCI Canada IndexSM,MSCI Greece IndexSM) for each respective country. Each index is a free float-adjusted marketcapitalization index that is designed to measure developed market equity performance in a particularcountry. (Slide 5)
The MSCI Europe IndexSM is a free float-adjusted market capitalization index that is designed tomeasure developed market equity performance in Europe. As of May 2005, the MSCI Europe Indexconsisted of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland,France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden,Switzerland and the United Kingdom.
The MSCI Pacific Index SM is a free float-adjusted market capitalization index that is designed tomeasure equity market performance in the Pacific region. As of May 2005, the MSCI Pacific Indexconsisted of the following five developed market countries: Australia, Hong Kong, Japan, New Zealandand Singapore.
Indices used in this
seminar
Your financial professional can evaluate your current asset allocationand discuss where the rest of the world fits into your portfolio.
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How to invest globally
Going Global, Getting Started
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and can help
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| NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE |
Print Seminar and Speaker Notes
Your financial professional can evaluate your current asset allocationand discuss where the rest of the world fits into your portfolio.